Net Worth: What It Is and Why It Matters for Your Finances

Net worth is the difference between what you own and what you owe. It’s an important number that gives you an overview of your overall financial health.

According to the Federal Reserve’s 2022 Survey of Consumer Finances (the most recent survey available), the median net worth of all U.S. households is $192,300, and the average is $1.06 million. Individuals and families with very high net worth tend to skew the data, so the average is usually higher. Still, these numbers can help us get an idea of ​​where you stand.

Curious to see how your net worth compares? Here’s what you need to know about calculating net worth and why it’s important.

What is net worth?

Net worth is the sum of all assets minus the sum of all liabilities. This figure helps evaluate the financial health of an individual or business. For individuals, initial net worth is often negative, especially if they have to borrow a lot of money to go to college.

However, a person’s net worth tends to increase as they get older. This happens as people increase their salary, pay off debt, and invest. If you include your home in your net worth calculation, decreasing your mortgage amount while increasing the value of your home can also increase your net worth.

However, these increases are not always linear. Certain situations can affect an individual’s net worth, such as: An economic downturn and subsequent job loss. Having high-interest debt, such as credit cards or personal loans, can make it difficult to make ends meet.

How to Calculate Net Worth

To calculate your net worth, first add up all your assets. This includes cash, stocks, bonds, savings accounts, retirement accounts, valuables and collectibles, and the equity in your home.

Next, add up your liabilities, such as car loans, personal loans, student loans, mortgages, and credit card debt.

Once you have the total of all your numbers, subtract your liabilities from your assets. The resulting number is your net worth. This number can be positive or negative. The goal is to increase this number over time.

The Importance of Knowing Your Net Worth

Net worth may seem like just a number on paper, but it is an important measure of your financial situation. Knowing your net worth can help you set financial goals and make a plan to achieve them. Additionally, monitoring your net worth regularly can help you understand your progress over time. Seeing the number grow can help you stay motivated as you build wealth.

Another reason knowing your net worth is important is because it’s an indicator of whether you’re on the path to financial stability. The estimated average Social Security payment as of January 24 is just $1,907 per month, or $22,884 per year. That’s not enough for most retirees to live on, especially when expenses like health care increase in later years. The Center for Employee Benefit Research says that a retired couple will need to set aside up to $383,000 just to cover health care costs in retirement.

If your net worth isn’t where you want it to be, you’re not alone. It’s certainly possible to increase your net worth, but you first have to get into the habit of tracking it.

Tools and resources for tracking net worth

Tracking your net worth is important, but it can be a hassle to constantly add up all your assets and liabilities. Fortunately, there are several tools and resources available to help you track your net worth. For example:

Financial advisors: If you’re already working with a financial advisor, they may have their own tracking tools. They may also be able to provide you with regular updates on your net worth and develop strategies to increase it.

Budgeting apps and software: If you’re looking for a cheaper solution than working with a financial advisor, there are plenty of free budgeting software and apps available. Many can be linked to a bank account and your net worth will be updated automatically.

Net Worth spreadsheet: Maybe you want to track your net worth on your own, but aren’t comfortable linking your financial accounts to a budgeting app. You can use a simple spreadsheet to track your net worth, and there are plenty of templates online to help you get started.